1041 for Trust after death became irrevocable K-1's Many questions

[maglib]

I'm new at this so please be kind.  If you can answer any portion of all my questions please comment as over 45 people looked already and no @experts have responded. I am the Trustee but, not a beneficiary of the following:

My aunt had a Revocable Trust established in 2017 , she passed away in 4/2023. I filed her personal tax return for all income already and she owes no taxes.

I got a EIN number and all assets of the Trusts including her home were transferred to the new irrevocable Trust. The home was sold in 2023.

The beneficiaries are 45%, 10%, 15%, 15%, 15% originally.

-the 45% and the 10% beneficiaries withdrew majority of their principal in  12/2023 other than some remaining for expenses for taxes and other costs of the estate and some future maturing bonds so they now own only a small portion of remaining assets. They had no interest in keeping it under Trust protection and Trustee (me) had full flexibility and they did not want to listen to my tax advice...

-we want the TRUST to pay all taxes and expenses or to pick and choose as there is complete flexibility to the Trustee on distributions which makes it complex.

-The plan is for the Trust to continue in perpetuity for the three beneficiaries who are 15% each which once all accounting is done, they will have 33.33% each as the 45 and 10% beneficiaries signed their rights and took almost all their distributions. there will be a final distribution in 2024 for the original 45% and 10% owners once we know the final bills and debts of the Trust and some tbills matured.

1.  It appears that I can't deduct costs of her funeral and other expenses incurred by the trust.  I have costs related to property maintenance, funeral, attorney, insurance, maintenance, supplies, home repairs, lots of mileage that were costs of the Trust upon her death.  I see no place in TT to enter these. Is it true?

2. There is a home that was in the trust. As it sat for a few months after death before sale, there is a loss due to expenses to maintain and drop in mkt value although short term. I do not believe home sales can show losses as it was immediately put up for sale but, sat for months needing maintenance. Correct? Or as it went into the Irrevocable trust upon death does something change about the status of the home investment? No 1099-S was received.

3.  When I enter the 1041 I assume this is a complex Trust as the choice as the Trust became Irrevocable at death and the Trustee has many powers on what is or isnt distributed.

4.  Is the date the entity created her date of death or is it when the revocable trust was created? I'm assuming DofD as that is when the ein was needed and it became it's own legal entity.  Or is it 2017 when she originally created the Trust as that is what the Trust title for the EIN still says?

5. I as trustee is doing this for free but, I do have expenses.  I did hire though a portfolio manager and attorney so I assume those can be entered as fiduciary fees.  Since all investments were taxable, I assume they all go toward taxable income?   Can any other investment expenses be entered like my costs of driving and hiring portfolio manager, and supplies, software, etc or TT is saying no as TCA took them all away. i had always thought Trusts could still deduct all these as they were entities. 

6. When TT asks about distributions, if I put in the $ amounts distributed it messes up the K-1 as it allocates based on amount distributed as TT has no way to say a distribution was 100% principal as the income is all taxed to the Trust.  The TRUST is supposed to be the one paying all the taxes.  Example let's say the Trust was 500k of principal, 3k interest, 4k dividends, and a capital loss of $5k du to fiduciary fees, legal.   Yet the 45% person took $200k out, and the 10% person took 43k out  leaving about $220k left in the trust of which $20k is reserves for unknown debts.  In 2024 there will be income to the trust and principal distributions to those people too  The k-1 and distributions entries has me perplexed.

7. How should the k-1's look as if I put the $ distributed in they get messed up as overallocations and person should not owe taxes on the funds.  How do you let TT know that the distributions are all principal?

Figuring once I get through year 1 this should not be so bad.  The beneficiaries are all over me about getting them their k-1's and filing the 1041 ASAP although i have been in/out of hospital.

Any help would be greatly appreciated.

[M-MTax]

1. Deduct attorneys fees and costs to preserve trust property. Funeral expenses aren't deductible on a 1041.

2. If the home is held for investment the trust can recognize a loss on the sale.

3. It's a complex trust. Any trust that is not a simple trust is a complex trust. A simple trust can't distribute corpus.

4. It's the date the trust became irrevocable....before then it was a disregarded entity.

5. None of those expenses are deductible thanks to the TCJA and Sec 67(e)

6 & 7. Not sure how TT handles this.....you may have to use forms view and enter on the worksheets or whatever but you can ignore distributions of principal.

[maglib]

@M-MTax I saw this, does it change your response or still same?  I was researching before I saw your response.  I am very thankful of your time responding.

 https://answerconnect.cch.com/document/arp286507d65c7b6c1000881c001b7840a5b20171/federal/irc/explana...

"

Expenses Deductible for Estate Tax

Various expenses are deductible from a decedent's gross estate for estate tax purposes.: Reg. §20.2053-1, Reg. §20.2053-2, Reg. §20.2053-3, Reg. §20.2053-6 and Reg. §20.2053-9. These expenses are deductible if they are payable out of property subject to claims that are allowable by the local law (whether within or outside the United States) under which the estate is being administered. For this purpose, the term "claims against the estate" refers to amounts that represent personal obligations of the decedent existing at the time of his death, whether or not then matured, and interest thereon which had accrued at the time of death. The list follows:

• Funeral expenses, including the cost of tombstones, monuments, mausoleums, burial lots, reasonable expenditures for future care, and the cost of transportation of the person bringing the body to a place of burial.

• Administration expenses, including:

  (1)	Amounts actually spent in the collection of assets, payment of debts, and distribution of property to persons entitled to it.
  (2)	Executors' and trustees' commissions.
  (3)	Attorneys' fees, including attorneys' fees in contesting a deficiency or prosecuting a claim for refund.
  (4)	Court costs, surrogates' fees, accountants' fees, appraisers' fees, etc.
  (5)	Cost of storing or maintaining property.
  (6)	Brokerage fees for selling property of the estate.
  (7)	Auctioneers' fees for selling property of the estate.
  (8)	Interest on federal and state income, gift, and estate tax deficiencies that accrues after death.

• Taxes (but only as claims against the estate) as follows:

  (1)	Property taxes that accrued before the decedent's death and were an enforceable obligation.
  (2)	Unpaid gift taxes on gifts made by the decedent before his death.
  (3)	Excise taxes incurred in selling property of decedent's estate (subject to certain conditions).
  (4)	Income taxes (subject to certain conditions).
  (5)	State death taxes (subject to certain conditions).

• Unpaid mortgages on, or any indebtedness on, property the value of decedent's interest in which is included in the gross estate undiminished by the mortgage or indebtedness.

Deductions are also allowed for the expenses of administering property of the estate that is not subject to claims. These expenses must be of the kind allowable if the property being administered were subject to claims. Also, the expenses must have been paid before expiration of the period of limitation for assessment in IRC § 6501. Usually, these expenses are incurred in connection with the administration of a trust established by a decedent during his lifetime. They may also be incurred in connection with the collection of other assets or the transfer or clearance of title to other property included in a decedent's gross estate for estate tax purposes but not included in his probate estate."

Thanks again.

[M-MTax · Accepted solution]

The CCH page you linked to and Regs you cited address deductions from the gross estate for estate tax purposes on form 706 not estate and trust income tax purposes on form 1041. Funeral and other final expenses are not deductible on form 1041. Some of the other costs could be eliminated by Sec. 67(e).

[jpendle]

If I can piggy back on this question, I have a similar but simpler situation. My mother's trust became irrevocable on her death. I'm trustee and sole beneficiary. All the assets (all financial) were distributed within two months of her death, but not before the trust earned $700 in dividends. There were no expenses. I'm filling out Form 1041 with trepidation. Here's what I think I need to do:

-Specify Complex trust, Initial and Final return

-Enter Dividends and Qualified dividends

-Claim $100 exemption

-Calculate tax from Qualified Dividends Worksheet of Schedule G (Result is $0)

-Sign and mail return.

Does that look adequate? I assume I don't complete Form K-1.  Apologies if this question is out of line. Many thanks!

[M-MTax]

Looks right @jpendle 

[jpendle]

Thanks! Just looking for a little confidence.